Commercial property: three ways to save tax

The effective rate of capital gains tax (CGT) has increased dramatically in recent years. When CGT was introduced in South Africa in 2001 the effective rate for companies was 15%. The effective rate is now 22.4%. So, since 2001 the effective rate of CGT for corporates has increased by nearly 50%. In addition, when a company distributes a profit after tax to its shareholders, they pay dividends tax at a rate of 15% (unless the shareholders qualify for an exemption, or a reduced rate).

Capital v Revenue: the taxpayer prevails – ommissioner for the South African Revenue Service v Capstone 556 (Pty) Ltd (20844/2014) [2016] ZASCA 2 (9 February 2016)

The question of whether an amount constitutes capital or revenue in a specific instance, is an issue that our courts have grappled with on many occasions. In Commissioner for the South African Revenue Service v Capstone 556 (Pty) Ltd (20844/2014) [2016] ZASCA 2 (9 February 2016), the Supreme Court of Appeal (SCA) had to deal with this very issue. The SCA had to decide two questions: whether the share sale of the taxpayer, Capstone, of approximately 17.5 million shares in JD Group Ltd (JDG), through which it made a profit of R400 million, constituted revenue or was capital in nature; and whether an indemnity settlement paid by the taxpayer after it had sold the shares, formed part of the base cost of the shares for purposes of capital gains tax (CGT).

Settlors beware: control over the assets of a trust

The establishment of an offshore discretionary trust (“the Trust”) by a South African tax resident person (“Settlor”) gives rise to various South African tax considerations. In terms of current law (which may or may not be impacted upon by the various proposals set out in the Davis Tax Committee’s First Interim Report on Estate Duty), the following taxes may typically be triggered by the Settlor in respect of the disposal of assets to the Trust in settlement thereof: capital gains tax at a maximum effective rate of approximately 13.65% of the capital gain realised; donations tax at a rate of 20% of the amount or the market value of the assets donated; and any income derived by the Trust in respect of any donation made by the Settlor may be attributed to the Settlor and accordingly subject to South African income tax in his/her hands.

Asset-for-share transactions

Section 42 of the Income Tax Act of 1962 (the Act) provides for tax roll-over relief in respect of asset-for-share transactions as defined. Such a transaction generally entails the disposal by a person of an asset to a company, and the issue of new shares by that company to the person, as consideration. One of the requirements is that the nature of the asset must be retained. In other words, if the person held the asset as trading stock, the company must acquire it as trading stock, and if the person held it as a capital asset, the company must acquire it as a capital asset. If the person held the asset as a capital asset, the company may acquire it as trading stock if the person (where the person is a company) and the company do not form part of the same group of companies.

Capital Gails Tax – Disposal of sectional title units to shareholders

The South African Revenue Service (SARS) released Binding Private Ruling, No 206 (the Ruling) on 14 September 2015. The Ruling dealt with the disposal by a share block company of sectional title units to its share block holders. A resident company (Applicant), and a resident trust (Trust), held shares in a resident share block company (Share Block Company). The Share Block Company owned three sectional title units. It was proposed that the Share Block Company would dispose of the sectional title units to the Applicant and the Trust. The Applicant and the Trust would then surrender their share block certificates and rights of use to the Share Block Company. These would then be cancelled.

Capital Gains Tax – Cross issue of shares and tax-free corporate migrations

In the 2015 Budget, the Minister of Finance indicated that paragraph 11(2)(b) of the Eighth Schedule to the Income Tax Act of 1962 (the Act), which deals with the issue of shares by a company, would be reviewed. The Taxation Laws Amendment Bill 2015 specifically addresses paragraph 11(2)(b). The issue of shares by a company (whether for cash, shares or other assets) generally does not constitute a disposal for capital gains tax purposes, although there may be capital gains tax consequences in terms of section 24BA of the Act to the extent that there is a mismatch between the value of the shares issued and the cash or assets received.

Assuming contingent liabilities in acquiring a going concern

Author: Erich Bell, Senior Tax Consultant at BDO South Africa SARS issued a draft interpretation note (DIN) in September 2015 on the tax implications of the assumption of contingent liabilities where a business is sold as a going concern. This article sheds some light on the assumption of contingent liabilities which specifically formed part of the purchase price relating to the acquisition of the business as a going concern.1 A purchaser can settle the purchase price for the acquisition of a business as a going concern by employing a combination of: cash consideration, assuming the seller’s debts, assuming the seller’s contingent liabilities, loan funding, or share issues.

Finality of advance payments by non-residents disposing of immovable property

Author: Ruaan van Eeden The 2015 Taxation Laws Amendment Bill (TLAB) proposes an amendment to s35A of the Income Tax Act, No 58 of 1962 (Act), dealing with the withholding of amounts from payments due to non-resident sellers of immovable property situated in South Africa. The proposed amendment raises an interesting point regarding administrative compliance with a country’s tax laws through the submission of returns for assessment versus a final withholding tax.

Energy sector license and consent charges: capital or revenue?

Recently two interesting cases were reported in New Zealand and Australia. The cases related to whether certain expenses incurred by taxpayers in the energy sector were deductible for purposes of income tax. In those countries – like in South Africa – taxpayers may generally not deduct costs of a capital nature for purposes of income tax. In the case of Commissioner of Inland Revenue v Trustpower Ltd [2015] NZCA 253 the taxpayer (Trustpower) generated and sold electricity. The taxpayer was developing new projects. In that process it incurred expenses in applying for and obtaining consents under the Resource Management Act 1991. The consents related to land use, water and discharge.

Few Cape Town developers cashing in on inner city tax rebate scheme

Author: Bekezela Phakathi (BDlive) There have been few takers of the Urban Development Zone tax incentive in Cape Town. The scheme also appears to have done little to boost the availability of affordable housing in the city’s CBD. The scheme, introduced in 2003, is an incentive administered by the South African Revenue Service (SARS) aimed at revitalising inner city areas by attracting capital investments in commercial and residential property through a tax rebate.